Much of financial planning involves money: earning it, spending it,
and saving it. But before money there was barter. In the old world,
Roman soldiers were often paid with sacks of salt, giving us the word
"salary." In the new world, perhaps the best-known example of
barter was when Peter Minuit exchanged $24 of trinkets and beads for the
island of Manhattan (see page 71). Although a great deal of barter
continues throughout the world, barter is inefficient when it comes to
paying for goods and services. As early as 2,500 BC, precious metals
began to be used throughout Egypt and Asia Minor. This naturally led to
the minting of the metals into coins that facilitated the process of
exchange, with the value of the coin being determined by the value of
the underlying metal (e.g., pound sterling).

The American dollar owes its name to a silver coin called the
Joachimsthaler that was first minted in Bohemia in 1519. Widely
circulated throughout Europe, in England it became known as the dollar.
In the United States paper money first appeared when it was issued in
varying denominations by the colonies. To finance the American
Revolution, the Continental Congress issued notes that were declared to
be redeemable in either gold or silver coins, but these notes eventually
became virtually worthless due to the lack of sufficient gold and silver
reserves. Although the federal government first minted silver
"dollars" in 1794, it was not until 1863 that a uniform
currency was established that replaced the paper money that had
previously been issued by local banks. Today, circulating currency, both
paper and coin, is no longer backed by either gold or silver reserves,
but rather by the full faith and credit of the United States.

Traditionally, there have been three basic forms of money:
currency, coins, and checks drawn on banks and other financial firms. To
these should be added credit cards, debit cards, and electronic payments
(both preauthorized and remote). Over the past ten years there has been
a continuing shift away from cash and checks to the use of electronic
payment by debit cards (both PIN and signature based). This shift is
expected to continue in the future. (1)

SAVINGS VEHICLES

Savings generally involves shorter-term goals with an emphasis upon
liquidity and safety of principal. In contrast, investing involves
longer-term goals with lower liquidity and less safety of principal. For
example, funds are saved in short-term interest-bearing debt instruments
such as certificates of deposit or United States Treasury bills (created
and transferred in the money market); whereas, funds are invested in
longer-term debt or equity such as corporate bonds or common stocks
(created and traded in the capital markets). (2) Unfortunately, in
practice the terms are often used interchangeably. (3)

Checking Accounts. Also known as regular checking, these are demand
accounts that allow the depositor to issue checks directing the
financial institution to pay the party listed on the check a specific
sum of money. The credit union version of a checking account is known as
a share draft account. Provided there are sufficient funds in the
account, there are no limitations on the withdrawal. A regular checking
account pays no interest on the account balance. Service charges may be
applied, but are often waived if a minimum account balance is maintained
or the account holder is over a certain age (the so-called
"senior" account). Both automated teller machines (ATMs) and
debit cards have become very popular ways of accessing funds in checking
accounts (see page 88).

NOW Accounts. In contrast to regular checking accounts, the NOW
(negotiated order of withdrawal) account pays interest on account
balances. Many other institution-specific names are used to describe
these accounts (e.g., "Checkplus Account"). Although all
savings account interest rate ceilings and minimum balance requirements
at commercial banks and savings institutions were removed in 1986, most
financial institutions impose their own minimum balance limits for
interest to be credited, often between $500 and $1,000. Interest is
credited at whatever rate is set by the institution and is typically
increased (tiered) if larger balances are maintained (e.g., amounts over
$2,500). Since fees will offset interest earned, evaluation of a
particular account should include determining exactly what, if any,
monthly or other fees are charged. Provided a minimum balance is
maintained, monthly fees are often waived. The dividend bearing share
draft account is the credit union version of a NOW account.

Super NOW Accounts. These are NOW accounts that are generally less
restrictive than Money Market Deposit Accounts (MMDAs). Interest rates
are usually higher than NOW accounts, but less than MMDAs. Tiered
interest rates are usually offered. Some accounts charge per item
processing fees for checks or deposits, some accounts do not impose
these fees, and still other accounts waive these fees provided a minimum
balance is maintained.

Savings Accounts. These accounts, also referred to as passbook
accounts, are considered the most basic of bank savings vehicles. The
term statement account is often used in reference to savings accounts
that record transactions by computer and provide either monthly or
quarterly statements in lieu of passbook entries. In contrast to demand
deposits, or checking accounts, savings accounts are also referred to as
time deposits, since the funds are expected to remain on deposit for
longer periods. In fact, many accounts stipulate that depositors may be
required to wait a stated number of days before receiving payment.
However, this requirement is often waived. While funds in a savings
account are both safe and liquid, the rates paid on savings accounts are
typically the lowest rates offered. Higher, or tiered, rates of interest
are usually paid on larger account balances or for time deposits.

Money Market Mutual Funds (MMMF). Also referred to as Money Market
Funds, these funds, issued by investment companies and insurance
companies, are handled by mutual fund managers. Shares are purchased at
a fixed price of $1 each and form a pool of money that is used to
purchase short-term and high-quality debt obligations of government
entities, commercial banks, and corporations (e.g., Treasury bills, bank
certificates of deposit, and corporate commercial paper). MMMFs are sold
as no load funds (i.e., no sales commission), but management fees are
charged. Although earnings are technically dividends, they are taxed as
interest income. Because the securities purchased are of very high
denominations, MMMFs are able to obtain the highest rates available on
the market. The interest rates change daily due to the fluctuating
nature of the funds portfolio of debts instruments. The minimum initial
investment and check writing privileges vary from one account to
another. Typically, checks must be for a minimum amount varying from
$250 to $500. Although not insured by the FDIC, if purchased from a
brokerage firm MMMFs are considered securities and are insured against
the bankruptcy of the firm by the Securities Investor Protection
Corporation (SIPC); but they are not insured against a loss stemming
from the underlying investments. However, because of their short-term
nature and high quality, most experts regard them about as safe as
commercial paper (commercial paper is unsecured, short-term debt
instruments issued by banks and corporations in order to meet immediate
cash needs). See also, page 174.

Money Market Deposit Accounts (MMDA). These accounts, also referred
to as Money Market Accounts, were developed by financial institutions in
order to compete against the Money Market Mutual Funds (MMMF) offered by
investment and insurance companies. Interest is market-based, meaning
that the rate will vary from week to week. Although the interest rates
are generally lower than those available with a MMMF, they offer two
advantages not enjoyed by the MMMF; the convenience of a local bank or
savings association and the safety of being federally insured (normally
up to $100,000, but temporarily increased to $250,000 per depositor
until December 31, 2013, see page 55). A minimum balance is required,
and withdrawals by check or electronic transfer are usually very limited
in number, with fees charged for any excess number of withdrawals (e.g.,
more than 3 per month). Because of these fees, MMDAs are more in the
nature of savings accounts than checking accounts.

Certificates Of Deposit (CD). Certificates of deposit are issued by
commercial banks, savings and loan associations, savings banks, and
credit unions. The most common maturity periods range from three months
to five years. Because funds are being committed for a longer period of
time, the rate of return earned on CDs is typically higher than those
offered on savings accounts and money market instruments. However, if
the funds are withdrawn prior to maturity, a penalty in the form of
forfeited | interest is assessed (e.g., three months interest). Tiered
rates are typically offered, with higher rates for longer terms and
larger amounts. Because rates can differ substantially from one region
of the country to another, it is wise to shop around for the best rate.
Higher yields can also be obtained from brokered CDs. These are larger
denomination bank CDs ($1,000 and up) that are purchased through brokers
who shop nationally for the highest available rates. The bank pays
commissions for brokered CDs. Unlike the typical CD, the funds in
brokered CDs can often be accessed early and without a bank-imposed
penalty by having a broker sell them in secondary markets. However,
rising interest rates will depress the value of a fixed-rate CD.
Laddering can be an effective way of providing some protection against
falling interest rates (see page 26). Although the rates are typically
fixed, there are hybrid CDs that offer variable rates tied to a specific
market index (e.g., the S&P 500). Because the frequency with which
interest is compounded is an important determinant of a CD's
return, it is important to determine the yield, not just the interest
rate (see page 87). While the vast majority of CDs are issued by
institutions insured by the FDIC, it is always important to verify that
a CD is federally insured.

Keeping Current

Current CD rates by locale, maturity, and size are available at:
www.bankrate.com/cd.aspx.

Digging Deeper

FDIC insured banks can be looked up by going to: www.fdic.gov/
deposit/index.html.

Asset Management Accounts (AMA). These accounts might be better
named "central asset accounts," in that the financial
institution is not actually managing the depositor's assets, but
rather acting as a central depository and agent who acts upon the
directions of the depositor. They were begun as bank-like services
offered by large brokerage firms and mutual funds, but are now also
offered by insurance companies and larger banks. They are intended to
foster a consolidation of both banking and investing services into one
relationship. AMAs are opened with a minimum deposit of cash or
securities, offer different levels of service, and charge varying annual
and transaction fees. They typically offer unlimited free checking,
purchase and safekeeping of securities, debit and credit cards, access
to automatic teller machines (ATM), direct deposit, automatic
"borrowing" and overdraft coverage, online access to account
information, bill-payment services, and advice from financial advisors.
A distinguishing feature of AMAs is the automatic daily, or weekly,
"sweep" of excess balances into a savings account paying
interest at higher money market rates. Another very attractive feature
is the monthly and year-end statement that summarizes all account
transactions, often in a format that facilitates the accounting
necessary for filing of income tax returns. The extension of credit in
AMAs is often in the form of a margin account, with the underlying
securities serving as collateral for any credit extended. Unlike a bank
loan, a substantial decline in the market price of these securities
could trigger a margin call (see page 152).

Treasury Bills. See page 111.

Zero-Coupon Treasuries. Also known as STRIPS, see page 113.

ANNUAL PERCENTAGE YIELD (APY)

This is the effective, or true, annual rate of return earned in an
interest-bearing account or instrument, expressed as a percentage. It
takes into consideration the effect of compounding. When the APY is
higher than the declared interest rate, the interest is compounded
(i.e., interest is being paid on interest). For example, if $1,000
placed in a CD paying 5% interest (compounded monthly) earns $51.16
during the period April 1 to the following March 31, the APY is 5.116%.
If interest were compounded quarterly, the APY would be 5.095% and the
interest earned would be $50.95. If the interest were not compounded,
the interest earned would be only $50.00 (i.e., simple versus compounded
interest). See also, The Magic Of Compound Interest, page 71.

www.bankrate.com/calculators/savings/bankcd-calculator.aspx

PAYMENT CARDS (AKA PLASTIC)

Credit Cards. Credit cards generally include any card that is
repeatedly used to borrow money or buy goods and services on credit.
They are issued by banks, savings and loans, retail stores, and other
businesses. Included are bank cards issued by banks and other financial
institutions, prestige cards providing a high limit of credit and other
benefits, affinity cards issued to groups of individuals with a common
bond or tie, retail credit cards accepted only by the issuing retail
establishment, and travel and entertainment cards that typically require
payment of the entire balance when billed. Provided balances are paid in
full as billed, they offer an attractive way of making purchases (and
taking advantage of the float between time of purchase and time of
payment). When balances are not paid in full, high rates of interest are
charged. In 2009, the annual average finance rate charged by credit card
plans was 13.40%.4 In 2007, over 46% of all United States families
carried a balance on their credit card with a median debt of $3,000.5 In
contrast, a charge card is also used for making payments, but charges
must be paid in full when the statement is received.

Debit Cards. The debit card may resemble a credit card in
appearance, but functions more like a checking account (it is also
referred to as a "check card"). When a purchase is made, the
transaction is immediately deducted from the cardholder's checking
account. Because the debit card is machine-readable, funds can generally
be withdrawn using automated teller machines (ATMs). Compared to the
credit card, the debit card does have certain disadvantages. Whereas a
credit card allows the unsatisfied purchaser to withhold payment, a
debit card does not provide the right of charge-back, by which the
holder can refuse to pay a questionable charge (i.e., the money is
already out of the account). Also, unlike the credit card, a debit card
does not have any float. And finally, contrary to popular belief, under
some debit card agreements banks will process debit card charges made
against insufficient account balances. The resulting overdraft charges
can be substantial.

ELECTRONIC FUNDS TRANSFER (EFT)

Also referred to as the electronic funds transfer system (EFTS),
this is the transfer of funds electronically rather than by check or
cash. Application of this technology to consumer transactions includes
Automated Teller Machines (ATMs) found in banks and other convenient
locations, Point of Sale Terminals (POS) used in retail establishments,
preauthorized payments of mortgages and other recurring bills, automatic
deposits of employee paychecks, telephone transfer systems, and internet
banking services using personal computers. The Federal Reserve's
Fedwire system and automated clearinghouses (ACHs) are both part of the
EFT system.

JOINT ACCOUNTS

The method of ownership of property, including savings and
investment vehicles, can have substantial consequences for the account
holders.

Joint Ownership With Rights Of Survivorship. When an account is
established in joint ownership with rights of survivorship, upon the
death of one owner the surviving joint owner immediately takes full
ownership of the account without the need for probate of the
deceased's will or to resort to state intestacy statues. Although
joint ownership is typically established between husband and wife, two
or more related and unrelated persons can also effectively use it. Each
joint tenant has an equal and undivided interest in the entire property.
Any co-owner of jointly held property may use, withdraw, sell, or give
away the property interest without the consent of the other owner(s).
The entire property interest is exposed to creditor claims of any
co-owner.

Tenancy In Common. Under this form of joint tenancy each co-owner
has a fractional, divisible interest in the property (i.e., it is the
opposite of joint tenancy with rights of survivorship). Upon the death
of a co-owner, his fractional interest is probate property and passes by
will or by state intestacy laws. Each surviving co-tenant retains his
proportionate interest in the property.

Tenancy By The Entirety. This is a form of joint tenancy that can
only exist between husband and wife. While some states do not recognize
tenancy by the entirety, others may place restrictions as to the type of
property that can be so titled (e.g., limited real property). Unlike
joint ownership with rights of survivorship, both tenants in a tenancy
by the entirety must agree to a transfer of the property interest.

Donald F. Cady, J.D., LL.M., CLU

(1) Source of data for chart of in-store purchases is New US
Consumer Payment Preferences Study, Payment News, October 6, 2008
(ww.paymentsnews.conV2008/10/new-us-consumer.html).